Demonetisation Cash Deposits and Section 68: ITAT Delhi Partly Deletes Addition in Case of Proven Cash Sales and Withdrawals

The Delhi Bench of the Income Tax Appellate Tribunal in Sahil Sareen Vs ITO examined whether cash deposits made during the demonetisation window could be taxed as unexplained cash credits under Section 68 read with Section 115BBE of the Income Tax Act 1961. The decision is significant for assessees facing additions linked to demonetisation, especially where cash deposits are claimed to arise from regular business operations and earlier bank withdrawals.

While the Tribunal did not accept the assessee’s unsubstantiated claim of cash gifts, it acknowledged that verifiable cash sales and recorded bank withdrawals constituted acceptable explanations for a substantial portion of the deposits. Consequently, the addition was scaled down substantially, granting partial relief.

Factual Matrix and Assessment Background

Profile of the Assessee

  • The assessee is an individual engaged in the wholesale trade of medicines.
  • Return of income for Assessment Year 2017-18 was filed on 25.12.2017 declaring total income of ₹36,96,540.
  • Income heads disclosed included:
    • Profits and gains of business or profession
    • Long-term capital gains
    • Income from other sources

Cash Deposits During Demonetisation

Following the announcement of demonetisation on 08.11.2016, the assessee deposited cash in multiple bank accounts between 09.11.2016 and 31.12.2016, as noted by the Assessing Officer (AO):

  • Current accounts: ₹24,92,000 (Punjab National Bank, Indian Overseas Bank, and IDBI Bank)
  • Savings bank accounts: ₹6,00,500 (Punjab National Bank, IDBI Bank, Corporation Bank, and Indian Overseas Bank)
  • Total cash deposits: ₹30,92,500

The AO treated these deposits as suspicious due to their timing (demonetisation window) and pattern when compared with earlier years.

Stand of the Assessing Officer

The AO undertook a detailed analysis and concluded that the cash deposits were not satisfactorily explained. Key grounds relied upon were:

  • Absence of cash sales historically: The AO recorded that, in earlier years, there were no reported cash sales of similar magnitude.
  • Non-production of books: The assessee did not produce regular books of account, vouchers, sales ledgers, purchase ledgers or stock registers. It was admitted in writing that no stock register was maintained.
  • Revised VAT returns: VAT returns for quarters ending September 2016 and December 2016 had been revised after about one year, which raised suspicion regarding the genuineness of the sales figures.
  • Unusual deposit pattern:
    • No cash deposits between April 2016 and October 2016
    • No cash deposits after 31.12.2016 (post-demonetisation window)
    • Only about ₹2,00,000 deposited in earlier years, against ₹30,92,500 during the year under consideration
  • Sudden spike in cash sales:
    • No cash sale in the immediately preceding year, as per AO’s finding.
    • Cash sales of ₹20.43 lakh reported just before demonetisation.
    • After demonetisation period, cash sales dropped sharply to ₹41,979 only.

The assessee had explained that the spike in cash sales was due to introduction of a new product from June onwards. The AO rejected this explanation as the product, according to him, appeared only briefly before demonetisation and was not sold thereafter.

Further, the AO found it illogical that, despite allegedly holding substantial cash balances, the assessee still made further withdrawals from bank accounts. According to the AO, a prudent businessman would not withdraw cash and sacrifice interest when already sitting on high cash in hand.

After allowing a credit of ₹2,50,000 towards past savings, the AO concluded that the balance amount of:

₹28,42,500 (₹30,92,500 – ₹2,50,000)

represented unexplained money under Section 68 read with Section 115BBE, and added the same to the total income.

The addition was sustained by the National Faceless Appeal Centre (NFAC), leading the assessee to approach the ITAT.

Assessee’s Explanation Before the Tribunal

Before the Tribunal, the assessee reiterated that the cash deposits during the demonetisation period were duly supported by:

  1. Cash sales from the medicine wholesale business, as reflected in VAT returns.
  2. Cash withdrawals from bank accounts made before 08.11.2016.
  3. Past personal savings.
  4. Alleged cash gifts from family members (later rejected for lack of evidence).